Entrepreneurs Wanted, Or Why You Should Start a Company During This Global Economic Downturn

So you had an amazing idea for a tech start-up that would change the world like Google, Microsoft, and Intel did. But in the blink of an eye, the global economy came crashing down on your dreams. You may be tempted to retract back into your cubicle, never to let your idea see the light of day. But think again. If history is any guide, the best time for entrepreneurship may be when the economy is at its worst.

General Motors was founded by entrepreneur William Durant during the Panic of 1907, while aerospace giant United Technologies emerged during the Great Depression of the 1930s. Biotech titans Amgen and Genentech were founded during the soaring oil prices and economic malaise of the mid-1970s. Cisco, Starbucks, and Home Depot became multi-billion-dollar enterprises despite the savings and loan debacle of the 1980s. And Google rose from the ashes of the dot-com conflagration.

To be clear, it’s still ugly out there. According to a PricewaterhouseCoopers study, first-round venture investments are a third of what they were two years ago. But the world -- and the checkbooks of VCs such as my firm Lux Capital -- are still open to innovative ideas in several areas. A lot of science and technology breakthroughs come from big companies, but in this environment, corporate inertia and a reluctancy to try new technologies have slowed down their innovation engines. And that’s where you -- the entrepreneur -- come in.

Instead of incremental advances, from Lux’s vantage point, now is the time to develop revolutionary ideas to solve today’s most critical problems. Today’s entrepreneurs ought not focus on "trinkets" that promise to be slightly cheaper or a bit more efficient than the current state of the art -- the market may not be willing to pay for these benefits. Thinking big doesn’t mean expecting to get funded with a pie in the sky idea scribbled on the back of a paper napkin (despite all the VC lore you hear). For starters, you need to understand the market you're entering: Who your customer will be and how much they will be willing to spend on your product.

For example, Lux recently backed a start-up developing radios that transmit over 100 times faster at prices comparable to those that are in your laptops and cell phones today. The concept had many implications, like eliminating all those nasty cables to our TVs or moving hours of HD video between our gadgets in seconds rather than hours. We chose to invest in the company because, among other things, they were able to clearly describe their immediate customers (television manufacturers), end users (television viewers), displaced competition (A/V cable providers), product manufacturing partners (chip foundries), and key decision makers (electronics retailers). The company had a solid sense of the challenges that needed to be overcome and was able to make a compelling argument as to why customers, and investors, would pay for their technology.

So you understand the market -- but can you navigate your way through rough waters? What do you do if, say, your customers postpone adopting your cutting-edge technology?

For one thing, make sure you’re armed with answers. Another start-up in Lux's portfolio started off expecting to produce fully-integrated MEMS and CMOS timing chips that don't require bulky, power-hungry quartz crystals. However, as the economy headed downhill, the already-conservative market was reluctant to entirely abandon quartz devices -- which have been in use since the era of vacuum tubes! In response, the company chose to enter the market with an early-entry product (without the MEMS) as an evolutionary step towards the fully-integrated solution. In the meantime, it partnered with a leading semiconductor firm to get the CMOS and MEMS technology ported to a world-class foundry. It now expects to introduce a variety of fully-integrated timing and sensing products in the near future.

The start-ups mentioned above are just two I'm familiar with (disclosure: Lux Capital and I personally have financial ties to these companies). VC firms have plenty of other successful stories to tell -- and, of course, many unsuccessful tales as well. With these examples, I'm trying to illustrate how entrepreneurs and management teams succeed by having laser focus on customers and flexibility to adapt to a changing environment. For first-time entrepreneurs, the lessons are the same.

Now get out of your cubicle and get started on that business plan.

PS: I'll be writing occasionally in this space about entrepreneurship and venture capital. Write me with questions: shahin.farshchi@luxcapital.com

Shahin Farshchi is a senior associate at Lux Capital. Based in California, he focuses on investments in semiconductor and energy technologies. He is an IEEE Member and holds a PhD degree in electrical engineering from UCLA.

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